Behavioral Biases of Dealers in U.S. Treasury Auctions

David Goldreich
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David Goldreich: London Business School and CEPR

No 2004.143, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper provides evidence of bounded rationality by large dealers in U.S. Treasury auctions. I argue that these dealers use a heuristic of yield-space bidding which leads to biases manifested in three ways: they submit dominated bids, i.e., those that could be improved without raising the bidding price; they bid in a manner that disregards the unevenly spaced price grid; and they round bids in yield space. Consistent with bounded rationality, I show that bidders are less susceptible to bias when the cost of suboptimal bidding is high. While the literature provides substantial evidence of behavioral biases among individual investors, they are less well documented for large sophisticated institutions that are likely to be important for setting asset prices. These primary bond dealers who regularly bid for billions of dollars in Treasury bill auctions are precisely such economic agents.

Keywords: Treasury auctions; Behavioral finance (search for similar items in EconPapers)
JEL-codes: D44 H63 H74 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-cfn, nep-evo, nep-fmk, nep-mic and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2004.143

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